CVB Financial Corp. (NASDAQ:CVBF) Q4 2022 Earnings Conference Call January 26, 2023 10:30 AM ET
Company Participants
Christina Carrabino – Investor Relations
Dave Brager – President and Chief Executive Officer
Allen Nicholson – Executive Vice President and Chief Financial Officer
Conference Call Participants
Matthew Clark – Piper Sandler
Clark Wright – D.A. Davidson
Kelly Motta – KBW
Eric Spector – Raymond James
Tim Coffey – Janney Montgomery Scott
Operator
Good morning, ladies and gentlemen, and welcome to the Fourth Quarter and Year Ended 2022 CVB Financial Corporation and its subsidiary Citizens Business Bank Earnings Conference Call. My name is Sherry, and I am your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Please note that this call is being recorded.
I would now like to turn the presentation over to your host for today’s call, Christina Carrabino. You may proceed.
Christina Carrabino
Thank you, Sherry, and good morning, everyone. Thank you for joining us today to review our financial results for the fourth quarter and year ended 2022. Joining me this morning are Dave Brager, President and Chief Executive Officer; and Allen Nicholson, Executive Vice President and Chief Financial Officer.
Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com and click on the Investors tab. The speakers on this call claim the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. And in particular, the information set forth in Item 1A risk factors therein. For a more complete version of the company’s safe harbor disclosure, please see the Company’s earnings release issued in connection with this call.
Now, I will turn the call over to Dave Brager, Dave?
Dave Brager
Thank you, Christina. I just want to make a quick comment before I start my prepared comments, but we’re experiencing a little bit of a windstorm down here in Southern California, so I apologize if there is a little background noise, we can’t turn off the wind unfortunately. But good morning, everyone.
The Bank generated full-year and fourth quarter earnings — the record full-year and fourth quarter earnings. Full-year net income in 2022 was $235.4 million, which represents an 11% increase over 2021. For the fourth quarter of 2022, we reported net income of $66.2 million or $0.47 per share, representing our 183rd consecutive quarter of profitability. We previously declared a $0.20 per share dividend for the fourth quarter of 2022 or a dividend payout ratio of approximately 42%. This dividend represented our 133rd consecutive quarter of paying a cash dividend to our shareholders.
Fourth quarter net income of $66.2 million or $0.47 per share, compared with $64.6 million for the third quarter of 2022 or $0.46 per share and $47.7 million or $0.35 per share for the year-ago quarter. For the fourth quarter of 2022, our pre-cash, pre-provision income was $95.4 million compared with $91.9 million for the prior quarter.
Pretax pre-provision income grew by approximately 43%, when compared to the $66.8 million earned in the year ago quarter. We recorded a provision for credit losses of $2.5 million for the fourth quarter of 2022, compared to $2 million for the third quarter and no provision for the year-ago quarter.
As previously mentioned, net income was $235.4 million for the year ended 2022, a $22.9 million increase, compared to 2021. Diluted earnings per share were $1.67 for 2022, compared with $1.56 for 2021. Pretax pre-provision income grew by 25% from $272 million for 2021 to $339 million in 2022.
In 2022, we provisioned $10.6 million for credit losses, which compares to a $25.5 million recapture of provision for credit losses in 2021. Continued expansion in our net interest margin contributed significantly to our earnings growth for both the full-year and fourth quarter of 2022.
Our net interest margin grew by 23 basis points, compared to the third quarter of 2022, while growing by 33 basis points over the full-year 2021. Our 2022 full-year average earning assets grew by more than $1.3 billion, compared to 2021, which included the acquisition of Suncrest Bank that occurred in January 2022.
However, fourth quarter average earning assets decreased by $521 million from the third quarter. This quarterly decrease in average earning assets reflects the decline in our funds held on deposit at the Federal Reserve, which declined for more than $2 billion on average in the fourth quarter of 2021 to approximately $125 million on average for the fourth quarter of 2022. In contrast to the decline in our Fed balance both our loans and investment portfolio have grown throughout 2022.
Now let’s discuss loans in more detail. Total loans at year-end were $9.1 billion or $1.2 billion or 15% increase from the end of 2021. Our new loan production remained strong in the fourth quarter and throughout 2022. New loan commitments were approximately $480 million in the fourth quarter, which compared with approximately $450 million in the third quarter.
After excluding loans acquired from Suncrest and PPP loan forgiveness, year-over-year loan growth was $634 million for a growth rate of approximately 8%. From September 30 to December 31 of 2022 loans grew by $305 million or 3.5%, while average outstanding loan balances grew by $160 million — $169 million or 2%.
After excluding PPP loan forgiveness and the seasonal increase in dairy and livestock loans, fourth quarter loan growth was $189.7 million or approximately 9% annualized. Dairy and livestock loans increased by $123.8 million from the prior quarter as many of our dairies choose to further mill proceeds into the first quarter of the following year and/or prepay their expenses.
The core loan growth from the end of the third quarter was led by continued growth in commercial real estate loans, which grew by $199.7 million or 3% annualized. Construction loans increased by approximately $12 million from the prior quarter, as many of our lines had increased usage as projects progress. C&I loans decreased by $3.5 million despite the overall line utilization rate for C&I loans increasing modestly from 32% to 33% at year-end.
Agribusiness loans declined by $13 million and SBA loans decreased by $14 million, including an $8 million decrease in PPP loans. Only $9 million in PPP loans remained from the $1.5 billion in loans we originated. We remain cautiously optimistic about our ability to grow high quality loans in 2023. Although higher interest rates and uncertain economic conditions could impact the level of growth, we achieved this year.
At quarter end, non-performing assets defined as non-accrual loans plus other real estate owned were $4.9 million, compared with $10.1 million for the prior quarter and $6.9 million for the year-ago quarter. At quarter end, we had no OREO properties and the $4.9 million in non-performing loans represented 3 basis points of total assets.
During the fourth quarter, we experienced credit charge-offs of $127,000 and total recoveries of $143,000, resulting in net recoveries of $16,000, compared with net recoveries of $379,000 for the third quarter of 2022. For the full-year of 2022 we experienced charge-offs of $197,000 and total recoveries of $1.1 million, resulting in net recoveries of $893,000.
Classified loans for the fourth quarter were $78.7 million, compared with $63.7 million for the prior quarter and $56.1 million for the year-ago quarter. The increase in classified loans from prior quarter was the result of a downgrade and a $13 million loan on a senior living facility acquired from Suncrest. As of December 31, 2022, classified loans included $22.8 million in loans acquired from Suncrest, which approximates the increasing classified loans from the end of 2021.
Now I’d like to discuss our deposits. A decline in deposits started in November, which is not unusual as we typically see seasonally low in deposits — seasonal lows in deposits from November through February. In addition to this typical seasonality, some of our customers deployed excess funds with our Citizens Trust Group and the slowing housing market has negatively impacted the deposit totals in our specialty banking group that focuses on escrow title and property management customers. Additionally, our customers continue to experience an inflationary environment, which is contributed to the cash burn.
During the fourth quarter, non-interest-bearing deposits averaged $8.7 billion, a $307 million or approximately 3% decrease from the average balance in the third quarter. Year-over-year we had a $377 million increase in average balance, when compared to the fourth quarter of 2021, including the $513 million in non-interest-bearing deposits acquired from Suncrest at the beginning of 2022.
Total deposits and customer repos were $14.2 billion on average in the fourth quarter of 2022, a $524 million or 3% decrease, compared with the prior quarter. While being $497 million higher than the fourth quarter of 2021. Non-interest-bearing deposits were approximately 63.6% of our average deposits for the fourth quarter, compared to 63.4% for the prior quarter and 63.8% for the year-ago quarter.
At December 31, 2022, our total deposits and customer repos were $13.4 billion, compared with $14.3 billion at September 30, 2022 and $13.6 billion for the same period a year ago. At December 31, 2022, our non-interest-bearing deposits were $8.2 billion, compared with $8.8 billion for the prior quarter and $8.1 billion from the year ago quarter.
The bank’s funding is primarily core to customer deposits and customer repos, which combined had a total cost of 8 basis points in the fourth quarter. This 8-basis point cost of deposits, compared with 5 basis points in the prior quarter and 3 basis points for the year-ago quarter. In comparison, the Fed funds rate has increased by 425 basis points, since the fourth quarter of last year.
The combination of seasonal growth in dairy and livestock loans seasonal deposit declines and the impact of cash burn on deposits from inflationary pressures resulted in borrowing overnight from Federal Home Loan Bank, averaging $161 million for the fourth quarter and peaking at year-end at $995 million. With slowing loan demand, the cash flow from our investment securities and the normal historical inflows of deposits we experienced from the beginning of the year, we expect borrowings to moderate in the first half of this year.
I will now turn the call over to Allen to discuss our investments, the allowance for credit losses and capital. Allen?
Allen Nicholson
Thanks, Dave, good morning, everyone. Our investment portfolio declined by $70.2 million from the end of the third quarter to $5.8 billion, primarily due to the decline in investment securities available for sale or AFS securities. AFS securities totaled $3.26 billion at end of the fourth quarter, which was inclusive of a pretax net unrealized loss of $500 million.
The decline in AFS securities reflects principal cash flows, which offset a $28 million increase in market value. It is highly unlikely that we would sell any AFS securities as the bank has ample off-balance sheet sources of liquidity, including more than $3 billion of unused borrowing capacity at the end of 2022.
Investment securities held to maturity or HTM securities, totaled approximately $2.55 billion at December 31, 2022. Cash flows from HTM securities were reinvested in the purchase of approximately $32 million in municipal securities with tax equivalent yields on these HTM securities greater than 5%. The growth in our investment portfolio over the last year resulted in HTM investments increasing by $628 million and AFS securities increasing by $71 million.
Securities have grown as a percentage of average earning assets from approximately 33% in the fourth quarter of 2021 to 39% on average in the fourth quarter of 2022. In addition to the increase in the size of our securities portfolio, the tax equivalent yield on the portfolio grew from 1.52% in the fourth quarter of 2021 to 2.12% in the third quarter of 2022 and now to 2.36% in the fourth quarter.
Our Fed balance averaged approximately $125 million for the fourth quarter of 2022, compared to $625 million in the third quarter and $2 billion in the fourth quarter of 2021. At December 31, 2022, our ending allowance for credit losses was $85.1 million or 0.94% of total loans, which compares to $82.6 million or 0.94% of total loans at September 30.
For the fourth quarter ended December 31, 2022, we recorded a provision for credit losses of $2.5 million, compared to $2 million for the quarter ending September 30, 2022. There is no provision for credit losses in the year ago quarter. The provision for credit losses in the fourth quarter was driven by loan growth, which resulted in a $190 million of core loan growth, after excluding temporary seasonal growth in dairy and livestock loans, as well as the decline in PPP loans.
For the full-year 2022, we had a provision for credit losses of $10.6 million, compared to a recapture provision for credit losses of $25.5 million in 2021. Our economic forecast continues to be a blend of multiple forecasts produced by Moody’s. These U.S. economic forecasts include a baseline forecast, as well as downside forecast. We continue to have the largest individual scenario weighting on the baseline forecast with downside risk weighted among multiple forecasts.
As of December 31, the resulting weighted forecast assumes GDP will increase by 0.3% in 2023, including a decline in GDP for the first half of 2023. Followed by modest growth of 1.3% for 2024 and then to grow by 2.8% in 2025. The unemployment rate is forecasted to be 4.8% in 2023, 5.1% in 2024 and then decline to 4.5% in 2025.
Now turning to our capital position. For the year shareholders’ equity decreased by $133 million to $1.95 billion at the end of 2022. Equity increased from the end of 2021 by $197 million for the issuance of 8.6 million shares to the former shareholders of Suncrest. Equity also increased due to year-to-date income of $235.4 million, which was offset by $108.1 million in dividends, representing a 46% dividend payout ratio.
Interest rates increased during 2022, resulting in an increase in the unrealized loss on our available for sale securities and a $351 million decline in equity from the end of 2021. In combination, the ASR and the 10b5-1 stock repurchase plans, we initiated in 2022 have resulted in the year-to-date repurchase of approximately 4.9 million shares at an average share price of $23.40, which reduced our common stock by $115 million.
Our overall capital position continues to be very strong. Our regulatory capital ratios are well above regulatory requirements to be considered well capitalized and above the majority of our peers. At December 31, 2022, our common equity Tier 1 capital ratio was 13.5% and our total risk-based capital ratio was 14.4%. The company’s tangible common equity ratio at December 31 was 7.4%.
I’ll now turn the call back to Dave, for further discussion of our fourth quarter earnings and net interest income.
Dave Brager
Thanks, Allen. Net interest income before provision for credit losses was $137.4 million for the fourth quarter, compared with $133.3 million for the third quarter and $102.4 million for the year-ago quarter. Fourth quarter earning assets decreased by $521 million on average from the third quarter, due to a decrease of $500 million in average funds on deposit at the Federal Reserve.
Our earning asset yield increased by 31 basis points, compared to the prior quarter. The increase in our earning asset yield was the result of a 24-basis point increase in investment yields, the 22-basis point increase in loan yields and a shift in the composition of earning assets with average loans growing from 56.6% to 59.7% of average earning assets, while our average amount of funds at the Federal Reserve declined from 4% to approximately 1% of earning assets.
Our loan to deposit ratio was 70.7% at quarter end, including the level of seasonal dairy and livestock borrowing. We anticipate funding future loan growth with cash flows from our investment portfolio, which approximate $150 million per quarter.
Our tax equivalent net interest margin was 3.69% for the fourth quarter of 2022, compared with 3.46% for the third quarter and 2.79% for the fourth quarter of 2021. The increase in our net interest margin was the result of the increase in our earning asset yield, while maintaining a low cost of funds that migrated from 5 basis points in the third quarter to 13 basis points in the fourth quarter.
During a period of time the Federal Reserve increased the Fed funds rate by 125 basis points. Loan yields were 4.78% for the fourth quarter of 2022, compared with 4.56% for the third quarter and 4.29% for the year-ago quarter. Yields on new production during the fourth quarter exceeded the overall portfolio yields, averaging greater than 5%. Current loan projection is generally close to 6%.
Our cost of deposits and customer repos were 8 basis points for the fourth quarter and our total cost of funds for the fourth quarter was 13 basis points. Interest-bearing deposits and customer repos decreased on average by $216.9 million from the third quarter, while non-interest-bearing deposits decreased by approximately $307 million on average. We continue to experience modest pressure to increase deposit rates, due to the recent increases in market rates. Recent declines in deposit levels including the typical seasonality have been impacted by customers using excess liquidity accumulated during the pandemic for ongoing business needs, which have been negatively impacted by inflation.
Over the last four quarters the Fed has raised short-term interest rates by 425 basis points, while our cost of funds and our cost of deposits and repos has increased by 5 basis points. Our total cost of funds has risen by 10 basis points from the fourth quarter of last year when factoring in the average overnight borrowings during the fourth quarter of 2022 at an average rate of 4.49%.
Moving onto non-interest income. Non-interest income was $12.5 million for the fourth quarter of 2022, compared with $11.6 million for the prior quarter and $12.4 million for the year-ago quarter. Our customer-related fees including deposit services, international and Merchant BankCard services increased by $500,000, compared to the third quarter and increased by $1.3 million or 28%, when compared to the fourth quarter of 2021.
Income from Bank Owned Life Insurance or BOLI, decreased by $570,000, compared to the prior quarter as death benefits declined by $1 million. Income from community development investments, some of which are impacted by mark-to-market adjustments increased from the prior quarter by approximately $700,000. Our trust and wealth management fees were flat, compared to the prior quarter while decreasing by $245,000 year-over-year. Market conditions have continued to negatively impact assets under management and trust fee income.
As we discussed in the past, a large trust relationship with more than $800 million in assets — excuse me, transitioned to a financial institution outside of California. The transition was completed by the end of 2022 and we’ll have the impact of decreasing our trust fees by approximately $425,000 this year. Offsetting this transfer of assets and the impact of the market on our assets under management and administration, we did grow managed assets with $350 million customer deposits that are now being managed by CitizensTrust in various liquidity strategies.
Now expenses. Non-interest expense for the fourth quarter was $54.4 million, compared with $53 million for the third quarter and $48 million for the year-ago quarter. Non-interest expense totaled 1.32% on average assets for the fourth quarter of 2022. This compares with 1.25% for the third quarter and 1.19% for the fourth quarter of 2021. Our efficiency ratio was 36.31% for the fourth quarter of 2022, compared with 36.59% for the prior quarter and 41.8% for the fourth quarter of 2021.
Employee-related expenses increased by $921,000 or 2.8%, compared to the third quarter of 2022. This quarter-over-quarter growth was primarily due to the distinct items such as our year-end holiday awards, final year and adjustments to bonus and commission accruals, severance accruals and increased valuations of performance RSUs that vested in early 2023. Employee expense grew by $4.6 million or 15% over the fourth quarter of 2021, which includes the impact of the Suncrest acquisition, as well as inflationary pressures, unemployed compensation.
We continue to invest in technology to further automate and scale processes within the bank, resulting in a 4% or $119,000 increase in software expense, compared to the prior quarter and a $299,000 or 10% increase over the prior year quarter. There was also a year-over-year increase of approximately $390,000 in consulting expense to support system upgrades and new technology implementations.
Occupancy and equipment expense was essentially flat quarter-over-quarter, but grew by almost $1 million over the fourth quarter of 2021, which includes the net addition of the remaining five banking centers from Suncrest. With the easing of pandemic restrictions, marketing expenses grew by $224,000 over the prior quarter and $470,000 over the fourth quarter of 2021. Legal fees increased by $130,000 over the prior quarter and $177,000 over the fourth quarter of 2021 as well.
We are pleased with our results in 2022 and remain committed to the mission and vision of Citizens Business Bank. The fourth quarter and full year of 2022 represented record quarterly and annual earnings for the Bank, and we ended the fourth quarter with a return on average assets of 1.60% and a return on tangible common equity of 23.65%.
Our focus on banking the best privately held small to medium-sized businesses and their owners has stood the test of time. We reported 183 consecutive quarters of profits and just paid our 133rd consecutive quarterly cash dividend, which was increased twice during 2022. We will continue to keep a watchful eye on the overall economy and business environment in order to best serve our customers and associates.
We’ve seen the impact on the bank as well as on our customers from a tight labor market, wage inflation and overall inflationary pressures. We are committed to supporting our customers, associates and shareholders and our communities as everyone continues to face potential economic uncertainty.
I would like to thank our associates for their hard work and dedication, our customers for their business and ongoing loyalty and our shareholders for their continued support and trust. As we move into 2023, we will remain disciplined in our approach and we will strive to maintain consistent earnings, strong capital levels and solid credit quality.
This concludes today’s presentation. Now Allen and I will be happy to take any questions that you might have.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question will come from the line of Matthew Clark with Piper Sandler. Your line is open.
Matthew Clark
Hey, good morning. Thank you. Maybe just first around the margin in the related outlook, I’m trying to get a sense for your deposit costs here coming into 1Q. Do you have the spot rate on interest-bearing deposits or total deposits at the end of the year? And then if you have it, the average margin in the month of December?
Dave Brager
Yes. We actually don’t — put the — this spot rate at the end of the year, there has been, I mean, I’ll start and then I’ll let Allen sort of jump in. But just a couple of thoughts here. Number one, I understand the question, but we’re originating new loans, like I said, very close to 6% and in some cases over 6%. We’re allowing the cash flow, the investment securities to run-off and utilize that to obviously pay down the borrowings and fund new loan growth. We will continue to have some deposit pressures, but we’ve been very fortunate and we’ve really done it on a rightful approach, Matthew. We haven’t had to make wholesale changes to our deposit rates.
So I feel pretty confident that we’ll continue to have best-in-class deposit cost and funding costs overall. But I get a little concerned, just making wholesale changes to the deposit rates, if I believe that the borrowings are going to be shorter term. Shorter-term being two quarters, three quarters, somewhere in that range. So I think we’re going to defend our margin the best we can. But I do think there is definitely pressure on the deposit side. So I expect that increase to what extent I can’t tell you exactly.
Allen Nicholson
Yes. I mean, Matthew, certainly in the next couple of quarters the cost of overnight borrowings will weigh a little bit on our margin overall. But as Dave said, as we get into the latter half of the year, we do foresee deposit growth impacting positively our overall cost of funds and then the shift in our earning assets should also improve our earning asset yield. So might be a little choppy the first two quarters, maybe a little bit longer than that, but we’re pretty confident of the more medium term.
Matthew Clark
Okay. Yes, I mean, that’s where I was headed. It seems like these — you run the math, I mean, the borrowings are pretty costly. But it sounds like there’ll be here just for two to three quarters, which is great. And it kind of suggests your margin is going to be probably lower over the next couple of quarters before it turns around. Maybe just on, I guess, what gives you confidence on the deposit side and what drove a lot of the run-off in non-interest-bearing and what gives you confidence that we kind of start to rebuild here in the second half?
Dave Brager
Yes, it’s a great question. We’ve done a lot of analysis around the deposits. And first I’d like to say, we haven’t lost any significant relationships. And the advantage that we have with CitizensTrust, which we move somewhere between $300 million and $400 million over the year really accelerating in the last couple of quarters to our CitizensTrust group for our customers to get higher yields. So we’ve kept those deposits in the family, so to speak. And I anticipate is as things change and if the Fed begins to slow or decrease rates that money is still here in the family.
The second thing is the slowdown in the real estate markets have really impacted our Specialty Banking Group and deposits there have also declined pretty significantly particularly in Title Escrow. People obviously are refinancing their houses and there is not a lot, not as many sales transactions going on. So escrow deposits are pretty significantly down. I think we actually peaked in our escrow deposits in the second quarter and there has been a steady decline since the second quarter of 2022. So those are both things that have happened.
And I’ve been saying this in the past, I think just the cash burn of the — of our customers deposits is something that’s real, Allen is going to laugh at me a little bit, but the average deposit account, checking deposit account at the bank and there’s more than 60,000 of them has decreased by about — around $12,000, $13,000. And I think, if you just take that multiply by the 63,000 plus accounts, there is a significant impact there.
Overall in the fourth quarter, typically, and we went back and looked like the last four years, pre-pandemic we have a 4%, 3% to 5%, 6% decrease in our average deposits every fourth quarter. So we don’t think this is a long-term thing. We haven’t lost the relationships. So, I feel good about that. That the thing we’ve done on the sales side, last year if you did $1 million well, if you’re a salesperson here relationship manager or manager. If you did a loan or if you did a $1 million loan or $1 million deposit your incentive was basically the same. This year, 2023, which they already have the plans. In 2023, if you do a deposit, you actually earn about three times the incentive that you do, is if you are — as you get $1 million loan? So we — sort of reallocated the focus to deposits which it’s always been on deposits. But I think that should help drive some additional opportunities for us as well.
Matthew Clark
Okay. Thank you for the color.
Dave Brager
Yes. You’re welcome.
Operator
Thank you. One moment for our next question. And that will come from the line of Gary Tenner with D.A. Davidson. Your line is open.
Clark Wright
Good morning. This is Clark Wright on for Gary Tenner. Thanks for the question. To start maybe if you could talk about expense growth. So maybe just on your expectations for 2023, as it relates to staffing costs and other inflationary pressure, that you already mentioned. The incentive structure, is there anything else going on in terms of initiatives to control expenses going forward?
Dave Brager
Yes, I’m going to let Allen, take the bulk of the answer here, but just one quick comment I will make. We’ve been running a pretty high vacancy rate over the past year, year and a half and that’s starting to come down slightly. So that’s a little bit of the impact. Obviously the Suncrest acquisition was an impact and the easing of pandemic. But Allen can give you a little more color, just overall.
Allen Nicholson
Yes. So, Clark, if you look at the fourth quarter and you adjust for some of the items Dave noted in his prepared remarks, you’re looking at about a 1% quarter-over-quarter growth in expenses. And that — so annualized that 4%, we’ll continue to probably see some growth in salary expense, which is natural, I mean, salary increases, usually happen in the middle of every year. Of course, our payroll taxes are always at their peak in the first quarter, keep that in mind.
We’re going to continue to invest in technology, both from customer perspective and including efficiencies internally and year-over-year in ‘22 we did grow by 10%. So I would just highlight those things and then also keep in mind the FDIC’s setting their assessment rates higher in ‘23. So that will be also a headwind for us from an expense standpoint.
Clark Wright
Got it. Awesome. And then maybe shifting over to loan growth, I mean, you talked already about the seasonality of it and then you also led to the pipeline. I mean, you’ve had strong growth up until fourth quarter. Maybe if you could talk about the pipeline at year-end? And then as bank operator even more cautious. Do you see any opportunities for additional growth moving forward from any particular segments?
Dave Brager
Yes. So a couple of comments I want to make on this. I mean, last year was really an unbelievable year for us, I mean, it was not the norm for us. And I think some of that came from the fact that we remained open during the pandemic and our bankers were still calling on customers and we had some very good success on the loan growth side, averaging 8%. And I’m excluding all the noise, the PPP and the seasonality in dairy and all of those things.
So we had a 9% annualized growth rate in the fourth quarter, 8% annualized for the year. So that was really I’d say higher than our typical growth. We are still focused on that mid — low mid-single-digit growth number, the pipelines have definitely slowed down, there is no question about it. I actually just went through this yesterday with our sales leaders, just kind of trying to get an idea of where we saw that going. So we funded over $2 billion in total loans last year, which was the highest loan growth or loan fundings in the history of Citizens Business Bank.
I would be extremely shocked if we did that again this year, because as I said, the pipelines have started to slow. I think the rate increases have started to impact people’s decisions. There is not as much refinance activity that’s occurring. There is still purchase activity that’s occurring. So, that’s on the kind of headwind side.
On the tailwind side, we won’t see as much refinance activity of our loans of other people offering lower rates, I don’t believe. And so we just remain disciplined in the pricing, and in the credit underwriting and that really generally equates to that kind of low- to mid-single digit loan growth for us. And I think that’s where we’re going to end up in 2023.
Clark Wright
Awesome. Thank you.
Operator
Thank you. One moment for our next question. And that will come from the line of Kelly Motta with KBW. Your line is open.
Kelly Motta
Hi, good morning.
Dave Brager
Good morning.
Kelly Motta
I would like to, kind of, throw in a bead of reinforcement circle back to kind of the size and mix of the balance sheet. I appreciate the color that you’re going to fund out of cash flows of your securities book. And I understand some of the deposit run-off is seasonal, so it will backfill those borrowings. But as we look ahead with — I know you changed your incentive structure to gather — incentivize more deposits.
But looking ahead with the pressure on the funding, do you expect to be able to grow the balance sheet over the course of the year or is the idea, the notion is really more of a flat side of your balance sheet? Any color on that would be really helpful.
Dave Brager
Yes. I mean, we — our goal is to grow every year, obviously, with all of the excess deposits that occurred over the last couple of years and all the enormous amount of stimulus that occurred, a lot of that I would say is not real and it’s starting to sort of run-off. So that is definitely something. But I think for us, we have a very narrow focus on a certain type of customer. So the overall growth in the market is not necessarily what we look to do. We’re very focused on the right type of customer for our bank. And so that’s always a challenge, because every financial institution out there is looking for that same customer.
But we believe we have a very good process and a very good story to tell. So our goal is to grow the balance sheet, but there will definitely be headwinds with respect to that, specifically the cash burn in customer’s accounts. But I do think, that we will perform well relative to our peers and a lot of different areas and be able to grow the bank.
Kelly Motta
Thanks so much for the color. Next one on credit, I mean, there is almost nothing to speak of NPAs, are super low, no net charge-offs. Just wondering, just given kind of where we are in the cycle? Are you starting to hear any concern or chatter from your borrowers, like are they starting to feel pressure now after the amount of rate hikes we had on cash flow? And any sort of color on that, because it feels like there is only one direction that credit cost can go, but it looks so good. So is there any color on that would be helpful.
Dave Brager
Yes. So I think for us, there really is only one direction credit cost can go, because you know we’ve had — we had net recoveries last year and we have very low non-performing assets. So that’s all positive. But to your broader question and point, yes, we are hearing a little bit more. We’re seeing a little bit more. But for the most part, our customers are very strong and well-heeled and have the ability to withstand some of this — that is recurring.
And remember, we only have a 33% utilization rate on our C&I loans. So we don’t see a lot of borrowings at this point. I do think that the impact of those borrowings, I should say. And I do think that, we will continue — that will continue to impact our customers, that will continue to drive some concern and we’re just paying a close eye, I mean, we’re very disciplined in how we evaluate credit, not just when we’re making it but following up.
I’ve mentioned this in the past, and I know my predecessors have mentioned this as well, but we have a very strict monitoring program that we track very closely to make sure we’re very close to our borrowers. We just don’t want any surprises. And I think that as we get through this year, we’ll probably see some more. But I really don’t anticipate it to be anything material impacting us. But there will be some more challenges. And I’ve said in the past too and I’ll repeat it, I think this is a consumer small business, small operating company, bigger impact and on the larger companies and customers.
Kelly Motta
Understood. Thank you. Thank you so much. I’ll step back.
Dave Brager
You’re welcome.
Operator
Thank you. [Operator Instructions] One moment for our next question and that will come from the line of Eric Spector with Raymond James. Your line is open.
Eric Spector
Hey, good morning, everybody.
Dave Brager
Good morning.
Eric Spector
This is the Eric on the line for David Feaster. Congrats on another solid quarter. I’m just curious what segments of CRE drove the strength this quarter and what’s your appetite for growth here, just given the uncertain economic outlook backdrop? Just any color on what segments you are providing good risk-adjusted returns from your standpoint? Just any additional color on that would be great.
Dave Brager
Yes. So, commercial real estate was the primary driver of the growth. It’s been kind of typical with almost two-thirds of our loans in commercial real estate. And I think that has been, and then if you want to get a little more into the asset classes within commercial real estate, it’s really kind of the — I’ll say the big three, and the big three has been industrial, multifamily and to little bit lesser extent, office. We are still seeing very solid credit. We have turned away things that we would not normally look at.
And so I think that’s been something that has been pretty consistent in our history and will be consistent going forward. We have a great — in our investor deck on page 29, it gives you a lot of color around the types of deals that we’re originating, while our overall portfolio looks like the largest segment being industrial, office being second, with a good amount of that being owner occupied. And we’re still seeing more sub-urban and rural opportunities. We’re not doing office loans in Downtown LA, that’s not what we do.
And then multifamily has been growing pretty fast there as well. So underwritten it, low loan to values at origination. With some tenure and obviously amortization on those loans, I think puts us in a pretty good spot. And then we focus on operating companies, so that’s part of the reason why we have the strong deposit base, because our operating deposits and they generally stay. And so we want to continue to drive that owner occupied operating company type loan.
Eric Spector
Okay. Yes, that makes sense. Thank you. And I just wanted to touch on capital. I know last quarter you kind of talked about, with the stock rallying up, that you kind of put it on pause, just with the appreciation in the stock or the depreciation stock over the last month or so, just curious what your capital priorities are going forward?
Allen Nicholson
Well, we still have a active 10b5-1 plan and it has different price threshold. So it is — I think possible, quarter ago we would instead of unlikely and I think at this point, as you mentioned with our stock down a little bit, it is possible we could see some modest buybacks, but not much, I would say, this is not going to be material.
Eric Spector
Okay. Thanks. And then kind of shifting gears, just curious if you could provide an update on some of the tech initiatives and like what’s on the docket to be added in near-term and then any color on efficiencies they’ll be able to drive?
Dave Brager
Yes. I’m saying this is a joke, I’m a tech experts, so I’ll take this one. So, as I have a bunch of paper in front of me and they make fun of me. But no, I think that for the most part, we’re on track with our tech initiatives. Really as Allen mentioned, it’s around efficiencies, robotic process automation we’re rolling out more and more processes with that which allows us to do things, create that capacity and operate without having to hire more people as we grow.
And so I think those initiatives are on track and we’re going to continue to focus on that. The costs associated with that is really minor, relative to the benefit that we get out of it, which again is why our efficiency ratio remains kind of in that 36% range. And so we’ll continue to look for opportunities to do that and to improve that the efficiency there and continue to drive automation.
Eric Spector
Okay. Great. Thank you for the color. I’ll step back and congrats again on a great quarter.
Dave Brager
Thank you.
Allen Nicholson
Thank you.
Operator
Thank you. One moment for our next question. And that will come from the line of Tim Coffey with Janney Montgomery Scott. Your line is open.
Tim Coffey
Great. Thanks. Good morning, gentlemen.
Dave Brager
Good morning.
Allen Nicholson
Good morning.
Tim Coffey
Hey, I appreciate the opportunity to ask question. Dave, I want to talk, see if you could provide some color on the opportunities to acquire new clients in the current environment. Clearly, the balance sheet is well suited to do it. And we’ve already seen in certain parts of the lending market where banks have started to pull back. How do you view this current environment in terms of adding new clients?
Dave Brager
Yes. I think the way you characterize it, is absolutely true. We’re seeing more opportunities, we’re not doing more necessarily, we’ve sort of — that’s our pipelines as I mentioned earlier sort of slowed down. But I think it’s a perfect opportunity for us. Although the loan to deposit ratio, the opportunity to continue to lend for the right borrowers, we’re seeing a lot of opportunities even on the deposit side today. Our — we sort of unleashed the hounds a little bit in our municipal group and in our Specialty Banking Group to really go out and get those deposits. And I think the environment is right, we just have to execute. And I think that’s something that we talk about daily. So we’re working hard to do that. But I agree with your overall assessment.
Tim Coffey
Okay. And in general, how long is the sales cycle to bring on a new client?
Allen Nicholson
Yes, it depends. I mean, in a Specialty Banking Group and the government services group, it’s a little bit longer cycle, but we foresaw some of this coming and actually unleash that in early to mid-last year. And so some of those relationships are going to start coming on now. So I think, it really just depends. If you’re talking about an operating company that sales cycle could be a year or two years of just constantly touching them and talking to them and offering information and help for them.
But the real estate sales cycle is much slower, just because generally people have a closing date that they have to get to. But for the type of client we go after it’s generally a little bit longer. And there is continuous, I should say, to the disruption in the market, especially with some of the previous mergers and acquisitions that have been announced and that’s creating opportunities for us. But we don’t want all their customers, we just want the ones that fit the type of client we go after.
Tim Coffey
Got it. All right. Thank you. Those are my questions.
Dave Brager
You’re welcome. Thank you.
Operator
Thank you. [Operator Instructions] And speakers, I’m showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Dave Brager for any closing remarks.
Dave Brager
Thank you very much, Sherry. As always, Allen and I appreciate all the questions and we want to thank everybody for joining us this quarter. We appreciate your interest and look forward to speaking with you in April for our first quarter 2023 earnings call. And then you can always reach out to Allen and I, if you have any questions. Have a great day, and thank you for listening.
Operator
Thank you all for participating, this concludes today’s program. You may now disconnect.
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